Payroll Outsourcing – The Ultimate Guide with Advantages and Disadvantages

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Payroll outsourcing may be on top of mind for many startup founders. As an entrepreneur, it might be overwhelming sometimes to handle payroll responsibilities. However, there are many options to manage your startup’s payroll. Many business owners make the mistake of choosing payroll outsourcing services for their HR operations without due consideration. However, it can turn into a risk too. 

As a payroll provider, you should always ask yourself which approach is the best for your business? Is it payroll outsourcing or using self-service payroll management system? In this article, I am going to take you through the following topics:

What is payroll outsourcing?

Payroll outsourcing is very common for businesses. It refers to the involvement of a third-party engagement to manage all the payroll-related responsibilities. Most importantly the approach is to save time, money and effort. Moreover, the service provider is responsible to handle the administrative and compliance functions of your company too.

What are the key ingredients of payroll outsourcing?

It is interesting to note that there are many components except gross salary and net salary that makes up a salary package. All the key ingredients are structured together in every payroll before the disbursement of the monthly salary. One of the most complicated steps for a service provider is framing the salary components. These are the following salary components:

Gross salary

The salary received by an employee per month before the deductions are known as gross salary. It is often calculated yearly. In other words, it is also known as CTC or Cost to the Company. The other components which are deducted from the gross salary are as follows:

Provident Fund and Professional Tax (P Tax) depend on the company’s size and the pay scale of the employee. Employees are also offered the option of Voluntary Provident Fund (VPF) or Public Provident Fund (PPF) which provides tax benefits. ESI refers to medical benefits provided to the employee which may or may not include paid medical leave.

Net salary

The salary received by an employee per month after the deductions is known as net salary. The components of net salary include:

  • Government deductions
      • Professional tax (PT),
      • Provident fund (PF),
      • Employee State Insurance (ESI)
      • Voluntary Provident Fund (VPF)/Public Provident Fund (PPF)
  • Other components may include
    • Basic pay
    • Housing Rent Allowance (HRA)
    • Dearness Allowance (DA)
    • Transport allowance
    • Special allowance
    • Food allowance
    • Leave Travel Allowance (LTA)
    • Uniform Exemption
    • Children Education Allowance
    • Mobile and Telephone allowance
    • Fuel allowance 
    • Car maintenance allowance
    • Labour Welfare Fund

Ad hoc-pay

Ad hoc-pay includes occasional pay like an annual bonus, incentives (based on performance), festival advance, or leave encashment. Some companies might also offer salary advance on a per-request basis which is also known as ad hoc-pay.


There are certainly long-term benefits provided to the employee such as gratuity, retirement plans, medical insurance, and family insurance cover, etc. These are often settled when the employee retires or resigns.

Also Read: Understanding salary structuring in India

How does payroll outsourcing work?

Let’s have a quick overview of how does payroll outsourcing work:

  • Firstly, you need to find a service provider that will help you manage all the administrative and compliance functions.
  • However, some amount of careful and intense research is required in this case.
  • Secondly, you have to compare the quotes with other service providers.
  • Thirdly, after the selection of the service provider, you need to set up an account. Most importantly provide them with the payroll report.
  • The payroll report gives them access to the payroll information of your company. It includes the employee size, working hours, policies, ad-hoc pays, benefits, etc. to calculate the final payroll.
  • With this information, the service provider is ready to run the payroll of your company.
  • Moreover, they also manage the details such as compliance, tax remittance, and reporting.
  • The last step is to disburse payroll funds from your account.

Top disadvantages of outsourcing payroll

Some common disadvantages of using payroll outsourcing are as follows:

Cost of payroll outsourcing

Most commonly the fee of outsourcing payroll is done on a monthly retainer basis. The fee can vary depending on many factors such as:

  • Location of your company,
  • Number of employees,
  • Frequency of the payroll,
  • Tax deductions, etc.

Service providers also provide customizable packages instead. This might lead to expenditures for factors included in the package that is not your requirement.

Furthermore, you might also attract extra charges if you need additional services which are not included in the basic package. Most of the payroll service providers in India include standard tax filing in their basic packages.  However, they might demand extra charges for yearly, half-yearly or quarterly tax preparation.

Time waste due to coordination with payroll outsourcing vendor

One of our founder’s relatives had a manufacturing business. Like many small business owners, he had outsourced payroll to a small business accounting firm. What he did not understand was that these accounting firms are small businesses themselves . That means these firms have the same struggles with paucity of resources as other SMBs. And as a result there was a payroll tax issue that arose due to a clerical error in one of the filings. That issue took about 2 years to clear. 

Poor communication with your service provider can lead to tremendous waste of time. This is because you are only increasing the number of stakeholders and steps in the process. Receiving the payroll report from your company for processing by the defined cutoff times is one of the biggest challenges. 

The time gap between when you send the payroll information to your service provider and when they receive it could be one of the reasons for the delay in payment to your employees and give you a hard time instead. This might also result in you paying fees and penalties for complaints that lead to an audit.

Payroll outsourcing leading to delayed salary transfers

Paying your employees timely can contribute to employee satisfaction and is very important in terms of compliance with the laws. As small as two payroll errors can lead to about half of your employees looking for other jobs. Delay in the paycheck delivery might result in complaints, putting you at risk of fees and penalties.

Incompatible system integration

Some payroll outsourcing service providers might not pair up with your company due to the lack of software programs that integrate with their platform. You may worry that you will have to make a big investment in making your technology better and add up to your expenditures.

Payroll outsourcing risking your data 

Your mistake of choosing a service provider who is not reputable or has policies to protect your data can cost you losing your sensitive company information and client’s trust. Security breaches in recent years can be one of the reasons to worry about when you are deciding to hand over your payroll information to a third party. 

Compliance and calculation errors

Compliance and calculation errors are the two most common mistakes done by payroll outsourcing service providers. This might lead to a delay in paychecks or lead to a difference in numbers. Frequent mistakes like these might put you at risk of fees and penalties.

Payroll outsourcing vendors might not be stable

You possibly can’t imagine your deposits disappearing. It will be a nightmare and a great loss for a company. This might happen in the extremely unlikely case of a payroll outsourcing service providing a company going out of business. This might happen if the service providers lack enough reserved funds to cover the cash flow of the processing period of the payroll for your company. Vendor instability is one of the roadblocks faced by businesses.

Payroll outsourcing resulting in a lack of company identity

Hiring a payroll outsourcing service provider can blur your company identity and trust. Having a self-service payroll management software helps gain trust of your employees, which is not the case when they see a different name on their payslips. The employees working for you will trust your company more than any other one with any documentation and administration related functions.

What are the advantages of payroll outsourcing?

There are several advantages to outsourcing payroll to another company especially for a startup.

Save time for building your business

At an early stage you may not have time to run your payroll process internally because you are busy running your firm. That time can be used to build your business.

Save cost of hiring an internal payroll specialist

In order to run payroll internally you may need to hire a payroll person internally. The cost for this hiring may be too much for an early stage startup.

Reduce risk of non compliance

If you are not a payroll expert you may be risking non-compliance because of incorrect calculations

What are the payroll outsourcing services?

Payroll outsourcing services help provide an end to end payroll management service to clients. The payroll outsourcing services may help in salary disbursals, compliance filings and payments and annual tax document generation such as Form 16 in India.

Which are the top payroll outsourcing companies in India?

There are several payroll outsourcing companie in India.


If you have only a few employees in India, you may explore the Employer of Record model or HR concierge model provided by Asanify. Asanify is rated as the number 1 payroll software for SMEs in India by Capterra (Gartner). So you may decide to outsource any payroll related hassles to asanify®. Additionally since Asanify is a startup serving other startup, it also provides a very cost effective solution.


ADP is a global behemoth that provides payroll outsourcing services to clients globally. 

Other local payroll providers

There may be several local payroll providers which offer state specific services. Asanify lists the top rated payroll providers in our partner directory.

What are the alternatives to payroll outsourcing?

If you are the founder of a startup then you must relate to the fact that most startup businesses tend to avoid hiring payroll outsourcing service providers especially in the initial days of their establishment. But, you can’t afford to face dire consequences in the long run during audits of the company accounts. Here are some of the alternatives to outsourcing payroll that you can consider:

Self-service payroll management software

In case if you have an employee strength of fewer than 10 people then you can opt for self-service payroll management software as it is both effective and cost-effective. A company with less than 10 employees has less amount of data to be managed, which can be done by payroll software.

Bookkeepers and Chartered Accountants (CAs)

Bookkeepers and CAs are also hired full-time on a paid basis for delivering financial reports, tax, accounting, audit and other economic services of the company. The financial statements of your business if being prepared followed by review of the financial declaration for the maintenance of your employees’ data and delivering bank interface services.


As HRMS is an automating payroll carrier it has some clear advantages for small businesses or startups like easy access to reward data, less manual input of data, reduction in staffing time, and a coordinated approach. You may try Asanify for free to explore a seamless payroll process

Payroll outsourcing or self-service payroll management software: which is better?

As a startup founder or a small business owner, payroll administration tasks can be overwhelming. But at the same time, engaging with a third party might not be the best approach for you. In-depth knowledge and research is required before you make a decision about how to manage your payroll responsibilities. So let’s try to find out the answer to this question: Outsourcing payroll or self-service payroll management software– which is better?

It’s very important to keep in mind that there is more to payroll responsibilities than paying your employees. The changing laws affecting the payroll policies of your company can make the process very complicated.

With outsourcing, you trust a third party agent to handle the compliance and administration functions of your payroll. Issues include:

  • Hidden fees,
  • Unwanted services in the package,
  • Extra services that you might need outside the package, etc. might add to your expenses.
  • Data breaches,
  • Delay in transfer of salary,
  • Compliance and calculation errors, etc

On the other hand, running payroll with the help of self-service payroll management software has proved to be a more reliable option for small business and startups. There are no worries about integration issues of your technology with the service provider’s system. As outsourcing involves a third party involvement, it is beneficial for a startup like yours to go for a more reliable and cost-effective option.

Advantages of using self-service payroll management software

More compatibility

It is more compatible with whatever system you are using currently. Since all the data (staffing details – names, phone numbers, bank details and so on) is being kept in the same system, and are being periodically updated by the employees themselves, payroll errors are statistically reduced to a huge percentage.

On-time salary transfer

With fewer opportunities to perform deliberate mistakes and periodic updates of data entered, there are higher chances of on-time disbursement of salary to your employees.


Total cost of outsourcing payroll services might cost you on a higher-end as it also includes extra charges for services that you might not need and the processing fee. On the other hand, one system that includes all your HR information and functions will cost you on a much lower end as compared to the former.

Single portal access

This also improves the ease of the user experience as all the related HR systems could be assessed from the same point. It doesn’t matter if it’s a worker wanting to check his/her paycheck or the CFO preparing the figures for a board meeting, you can access it with simple steps, in line with your other business systems.

More accurate data

In terms of integration, a self-service payroll management software will be more accurate in its data analysis and interpretation. This means you have to spend less time correcting the errors.

More security

The payroll records of your company include very sensitive information such as security numbers, bank details, etc. which can be a reason for great loss for your company if not kept safely. Keeping all the data in one system which is secure will help the risk of a security breach, which might be the case in payroll outsourcing.


A significant advantage of using an automated system for your HR operations is when there is a change in regulatory laws. Moreover helps reduce the chances of errors made in calculations otherwise.



Both payroll outsourcing and self-service payroll management software helps you manage one of the most important HR functions of your business. In general, depending on the company size the self-service payroll management software is considered to be a better option for startups and small businesses. This helps to have more control over the payroll process. Further during the initial days of the company’s establishment.


Who needs payroll services?
Payroll services are really important for all kinds of businesses, whether you have one employee or 50. A payroll service will help you prepare paychecks of your employees and report payroll taxes on time. It is very important to note here that delayed delivery of paychecks might push you towards the risk of penalty.

When should you outsource payroll?
Efficient administration of payroll functions increases the credibility of your company. It is very important for businesses to handle their payroll functions with the utmost attention. As calculation errors and delay in the delivery of paychecks might ruin the reputation of your company. 

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.